British Columbia Forest Products Ltd. v. MNR, 71 DTC 5178, [1971] CTC 270 (SCC)

MARTLAND, J. (all concur) :—This appeal is from the judgment of the Exchequer Court, which dismissed (save as to one agreed item) the appellant’s appeal from the assessment of its income tax, for the taxation year 1963, made by the respondent.

The appeal involves two separate issues :

(a) Whether or not the respondent was right in classifying, for purposes of capital cost allowance, 24 specified items of the appellant’s property (hereinafter sometimes referred to as ‘‘the disputed assets’’) as falling within Class 3 of Schedule B to the Income Tax Regulations, enacted pursuant to the Income Tax Act, R.S.C. 1952, c. 148 (hereinafter sometimes referred to as “the Act’’) instead of Class 8. While the appellant contends that these items also fall within Class 19, it has been agreed that the issue in this appeal is as between Class 3 and Class 8, and that, if the appeal on this point is allowed, on the further issue, as between Class 8 and Class 19, the assessment should be referred back to the respondent for re-assessment, to determine whether some, or all, of the items also fall within Class 19.

(b) Whether or not the respondent was right in his calculation of the deduction to be allowed, from tax, pursuant to Section 41A of the Act, in respect of logging tax paid by the appellant, pursuant to the Logging Tax Act, R.S.B.C: 1960, c. 225.

Capital Cost Allowance

Section 11(1) (a) of the Act permits a taxpayer, in computing his income, to deduct :

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

The portions of the Regulations relevant to this appeal are contained in Schedule B thereto and provide as follows :

Class 3

(5%)

Property not included in any other class that is

(a) a building or other structure, including component parts such as electric wiring, plumbing, sprinkler systems, air- conditioning equipment, heating equipment, lighting fixtures, elevators and escalators,

(b) a breakwater (other than a wooden breakwater), (c) a dock,

(d) a trestle,

(e) a windmill,

(f) a wharf, or

(g) an addition or alteration made after March 31, 1967, to a building that would be included in this class but for the fact that it'is included in Class 20.

Class 8

(20%)

Property that is a tangible capital asset that is not included in another class in this Schedule except land, or any part thereof or any interest therein and also excepting

(a) an animal,

(b) a tree, shrub, herb or similar growing thing,

(c) a gas well (other than a gas well that is part of the equipment of a farm and from which the gas produced is not sold),

(d) a mine,

(e) an oil well,

(f) radium,

(g)-(j) [Revoked],

(k) a right of way,

(l) timber limit, and

(m) tramway track.

Class 19, to which reference has been made, provides for a larger capital cost allowance in respect of property which would be included in Class 8, if certain defined requirements are met. Its provisions are not relevant to the decision of this appeal.

The disputed assets from a part of the appellant’s paper mill which is located at Crofton, British Columbia. The appellant also holds timber limits from which it acquires the logs necessary for the manufacture of paper. The logs that are not suitable for paper-making are sold or traded and it is the income from these transactions which gives rise to the second branch of the appeal.

The ‘‘stone groundwood paper-making process’’ which is used at the Crofton mill consists of one main process flow with several ancillary recovery systems. When running at full production the mill is capable of producing 395 tons of newsprint every 24 hours and this requires approximately 2,500 gallons of water per minute. Accordingly, high capacity equipment and machinery are required.

The manufacturing process commences in the Grinder Room portion of the mill where the pulp logs are ground into fibres which are mixed with water to form groundw ood stock. The stock then passes through coarse screens and flows into the Screen Room portion of the mill where it is further screened and thickened. Sereening and thickening result in the removal of fibrerich water whieh is recovered and reintroduced into the initial stages of the main process flow. Next the stock is bleached and washed. It is then combined with kraft stock and broke stock and sent to the Machine Room portion of the mill. “Kraft stock” is stock from a chemical manufacturing process which is separate from the process now being described. ‘‘Broke stock’’ is stock that has been recovered at a later stage of the main process flow. The mixture of groundwood stock, kraft stock and broke stock is then blended and delivered to the paper machine where it is pressed, dried and formed into a paper sheet. Further quantities of fibre-rich water are drained off and recirculated. The trim from the paper sheet is broken down by a repulper and this is reintroduced as the broke stock.

The foregoing process is carried on in the mill building. In addition there are five ‘‘silo like’’ tanks used for storage and for the treatment of the stock. The following is a brief description of the disputed assets and their functions.

The main mill building consists of three rooms, viz., the Grinder Room, the Screen Room and the Paper Machine Room. Kach room has an operating floor where various machines convert the pulp logs into newsprint. The floor and-machinery are supported, in part, by a series of high capacity ‘‘chests’’ which are built into the ground or basement floor: Each of the chests performs a unique function in the paper-making process. The walls of the chests and the mid-feathers, which are used to keep the liquid stock circulating, are constructed of. reinforced concrete and are designed so as to be able to withstand the lateral pressure of the agitated stock.

The coarse screen stock chest (Item 2) is located on the ground floor of the Grinder Room. The grinder machinery is supported by a series of 16 reinforced concrete piers (Item 1) which run vertically from the ground floor into the operating floor. In the Sereen Room, the operating floor acts as a lid for six chests which extend from one end of the room to the other (the chest walls are Item 7). In order to bear the weight of the chests and the Screen Room machinery, additional reinforced concrete foundations (Items 4 and 5) were sunk into the ground beneath the basement floor. The couch pit (Item 12) and the machine white water chest, wire pit and machine chest (all three comprise Item 13) are located on the ground floor of the Paper Machine Room. There are further footings (Item 11) which support these items and the paper machine,

Overhead cranes are situated in the Grinder Room and in the Paper Machine Room so as to facilitate the servicing of the heavy machinery. The cranes straddle the width of the building and move on tracks which sit on horizontal ‘‘I’’ beams. The “I” beams are welded and bolted by means of plates and braces to columns which were constructed so as to withstand the weight of the crane, but which also support the roof of the building. The steel “I” beams, plates and braces which are located in the Grinder Room make up Item 3. The steel “I” beams, plates and braces in the Paper Machine Room, together with those parts of the supporting columns which are required for the support of the craneway, make up Item 16.

Because the production process results in considerable quantities of stock being spilled on to the Screen Room’s operating floor it was necessary to create a drainage system. This was done by making troughs in the floor before the concrete had dried (Item 6). Eight feet above the Screen Room’s operating floor is a specially designed operator’s platform (Item 10) which provides access to the machinery on the operating floor. The platform is made of structural steel and rests on-steel columns which in turn are bolted on to concrete pedestals on the operating floor.

On the west side of the Paper Machine Room are two long narrow floors—the mezzanine floor (Item 14), which is 19 feet above the paper machine, and the fan floor, which is 36 feet above the operating floor. The mezzanine floor is made of reinforced conerete and contains various pieces of equipment which are required for the operation of the paper machine. The fan floor is constructed of ‘steel plate and supports four exhaust fans which. are mounted on “concrete pads’’ (Item 15). The “pads” are used so as to reduce the vibrations caused by the fans. Both floors are supported by horizontal steel beams which are supported in turn by steel columns. Steel stairs (Item 17) provide access to the mezzanine and fan floors and movable steel handrails (Item 18) are placed around. open hatches and at the edge of the mezzanine and fan floors.

Outside the mill building are constructed the five tanks used for the storage and treatment of the stock, viz., the blending tank and the broke tank, which are 45 feet high, the kraft high density tank and the groundwood high density tank which are 113 feet high, and the zine hydro bleach tower which is 120 feet high. Each tank has a reinforced concrete base. On top of the concrete base is a recess into which are inserted eight-inch timbers or staves which stand upright and are bound together by steel bands to form tank walls. The entire groundwood high density tank, blending tank and broke tank, the concrete base of the zine hydro bleach tower and the wooden stave portion of the kraft high density tank comprise Items 9, 22, 23 and 24. Surrounding and attached to the blending, broke and groundwood high density tanks and the zine hydro bleach tower are steel staircases and platforms (Item 8) which provide access to equipment attached to the tanks.

The chemical recovery unit, which is also self-contained, is approximately 130 feet high and houses a 100-foot boiler. Its function is to recover chemicals that have gathered impurities while being used in the manufacturing process. The boiler is suspended from the top of the recovery unit by steel rods connected to horizontal beams which are supported by six main steel columns. The columns are connected to the framework of the unit by a network of steel columns, cross ties and cross bracing. This framework was designed to resist both wind and earthquakes. The main horizontal beams from which the boiler is suspended, the six main columns and the framework are Item

21. The concrete footings and floors which support the boiler’s framework are Item 19. Located throughout the recovery unit are stairs, ladders and platforms (Item 20) which aid in the operation and maintenance of the equipment. The boiler, itself, is not in issue and has been determined as falling within Class 8.

The disputed assets can be divided into three categories, i.e. those used in the production process, e.g. the chests and tanks; those used to provide access to the equipment, e.g. the platform in the Screen Room, the stairs and handrails; and those which provide support for the equipment, e.g. the piers, the steel “I” beam, the concrete pads and the supports and walls of the tanks.

The learned trial judge held that all of the items in dispute fell within Class 3. His reasons for so deciding are summarized in the following passage from his judgment (page 177) :

The disputed assets in Items 1 to 18 inclusive excepting Items 8 and 9 are all within the mill proper. All such items are built into and are part of the mill. Coburg Hotel v. London County Council (1899), 81 L.T. 450. The mill is a building as it is built or constructed. Springman v. The Queen, [1964] S.C.R. 267. These items are attached to the mill and hence are mill and . . . not machinery. Hiram Walker & Sons Ltd, v. The Town of Walkerville, [1933] S.C.R. 247. Adel Building Corporation Ltd. v. M.N.R. (1962), 29 Tax A.B.C. 309.

The remaining disputed assets consist of the chemical recovery unit (Exhibit 1, Items 19 to 21 inclusive), and the tanks (Exhibit 1, Items 8 and 9 and 22 to 24 inclusive). All these are structures. They are built up from component parts and intended to remain permanently on a permanent foundation as in Cardiff Rating Authority v. Guest Keen Ltd., [1949] 1 All E.R. 27 at 31. They are composed of different things put together or built together and constructed to make one whole as in Hopday v. Nicol, [1944] 1 All E.R. 302. They are built or constructed, a building or edifice as defined in The Shorter Oxford English Dictionary, City of London v. John Labatt Ltd., [1953] O.R. 800. It is not necessary to decide whether these structures among the disputes assets are also buildings.

The appellant’s position may be summarized as follows: The learned trial judge was in error in holding that the disputed assets did not fall within Class 8. This class is in the nature of a “basket” class, which covers ‘‘any tangible capital asset’? not included in another class. The words ‘‘building or other structure” in Class 3 cover only that property in which a business is carried on and not property with which such business is carried on. The disputed assets did not house the appellant’s business but were all an essential part of the appellant’s manufacturing process. They were part ¢ of the plant, rather than buildings or structures.

The case of C.I.R. v. Barclay Curie & Co. Ltd., [1969] 1 All E.R. 732, was cited to illustrate the above distinction. That case was concerned with the application of the [British] Income Tax Act 1952, e. 279, in respect of initial allowances permitted under Chapters I and II of Part 10 of that Act. The former made an allowance of %, on capital expenditures on industrial buildings and structures. The latter permitted an allowance of 49 on capital expenditures on machinery and plant. The larger allowance was permitted in respect of a dry dock. Reference was made by Lord Guest at page 746 and by Lord Donovan at page 751 to the proposition stated by Pearson, L.J. in Jarrold (Inspector of Taxes) v. John Good & Sons Ltd., [1963] 1 All E.R. 141 at 149, that plant is that with which the trade is carried on as opposed to the place where it is carried on.

It is clear, however, that under the statute in question in that case an object could qualify not only as a building or structure but also as machinery or plant, and, if it did, would be entitled to the larger allowance. The case did not hold that the dry dock was not a structure.

The present case is different. If the disputed assets are within the words ‘‘building or other structure’’ in Class 3 they would be tangible capital assets “included in another class” and so would be excluded from Class 8. Accordingly, even though they may form a part of the manufacturing process, that does not necessarily mean that they fall within Class 8.

In my opinion the learned trial judge was right in holding that the disputed assets fell within Class 3. The items in the mill building, while they may have formed part of the manufacturing plant, were a part of the very fabric of the mill building. They were not chattels which were merely attached to the building, but were a part of the building itself. I will not review all of the disputed assets in that building, but will cite examples. The supporting piers, the reinforced concrete foundations and the chest walls are seen, on an examination of the plans and photographs filed as exhibits, to have no separate existence as. tangible capital assets. It is true that they would not have been created except to provide the means for the appellant’s production flow, and the mill building was designed specially to achieve that purpose. Nonetheless, the tangible capital asset is the mill building itself, including everything which is a part of that building, and, as a building, it falls within Class 3. What has been said about the examples cited applies equally to the other disputed assets in that building. The mezzanine floor would not exist save to assist in the production process, as also the stairways and accompanying handrails, but they are a part of the mill building. The steel “I” beams and some of the supporting columns were designed with a strength necessary to support the craneway, but they provided support in the building itself and were a part of it.

The tanks and the recovery unit are, in my opinion, structures, if they are not buildings. I do not think that the word “structure” as used in Class 3 must be construed ejusdem generis with the word “building”. It is preceded by the word “other”, thus contemplating structures other than buildings. The point was considered, though in relation to a different statute, in Springman v. The Queen, [1964] S.C.R. 267. That case dealt with a charge under Section 374(1) (a) of the Criminal Code, which makes it an offence wilfully to set fire to a building or structure. Hall, J., delivering the reasons of the majority of the Court, said that the term ‘‘structure’’ was not to be construed ejusdem generis with the term “building”.

A similar view is expressed by Lord Goddard, C.J. in London County Council v. Tann, [1954] 1 All E.R. 389 at 390, in relation to a provision in the London Building Act, 1950.

In determining what is a structure, reference may be made to the judgment of Denning, L.J. (as he then was) in Cardiff Rating Authority v. Guest, Keen Baldwin’s Iron & Steel Co. Ltd., [1949] 1 K.B. 385 at 396, which was cited in this Court by Hall, J. in the Springman case :

À: structure is something which is constructed, but not everything which is constructed is a structure. A ship, for instance, is constructed, but is not a structure. A structure is something of substantial size which is built up from component parts and intended to remain permanently on a permanent foundation but it is still a structure even though some of its parts may be movable as for instance about a pivot thus a windmill or a turntable is a structure.

I think this test can properly be applied to the facts in the present case, as it was by the learned trial judge, and I would agree with his conclusion that the disputed assets outside the mill building were structures within the meaning of Class 3.

Deduction from tax, pursuant to Section 41A of the Act, of logging tax paid by the appellant

The issue on this branch of the appeal involves the interpretation of Section 41A of the Act, and is concerned with the proper amount deductible from tax by the appellant in respect of logging tax paid by it during the relevant taxation year.

Section 41A provides as follows:

41 A. (1) There may be deducted from the tax otherwise payable by a taxpayer under this Part for a taxation year an amount equal to the lesser of

(a) /3 of any logging tax paid by the taxpayer to the government of a province in respect of income for the year from logging operations in the province; or

(b) 6% % of the taxpayer’s income for the year from logging operations in the province referred to in paragraph (a).

(2) In subsection (1),

(a) “income for the year from logging operations in the province” has the meaning given to that expression by regulation;

(b) “logging tax’? means a tax imposed by the legislature of a province that is declared by regulation to be a tax of general application on income from logging operations;

and

(c) “tax otherwise payable by a taxpayer under this Part” for a taxation year means the tax for the taxation year otherwise payable by the taxpayer after making any deduction under section 33, 38, 40 or 40A and before making any deduction under section 41 or this section.

The relevant portions of Regulation 700 provide:

700. (1) Except as provided in subsection (2), for the purpose of section 41A of the Act “income for the year from logging operations in the province” means the aggregate of

(a) where standing timber is cut in the province by the taxpayer or logs cut from standing timber in the province were acquired by the taxypayer, if the logs so obtained are sold by him in the province prior to or on delivery to a sawmill, pulp or paper plant or other place for processing logs, his net profit for the year from the sale of the logs;

(d) where standing timber is cut in the province by the taxpayer or logs cut from standing timber in the province have been acquired by the taxpayer, if the taxpayer operates a sawmill, pulp or paper plant or other place for processing logs in Canada, the income of the taxpayer for the year from all sources minus the aggregate of

(i) his income from sources other than logging operations and other than the processing and sale by him of logs, timber and products produced therefrom,

(ii) any amount included in the aggregate determined under this subsection by virtue of paragraph (a),

(b) or (c), and

(iii) an amount equal to 8% of the original cost to him of properties described in Schedule B to these Regulations used by him in the year in the processing of logs or products derived therefrom or, if the amount so determined is greater than 65% of the income remaining after making the deductions under subparagraphs (i) and (ii), 65% of the income so remaining or, if the amount so determined is less than 35% of the income so remaining, 35% of the income so remaining.

Subsection (2) of this regulation is not applicable to the facts of this case. Subsection (3) provides, among other things, that the tax imposed under the British Columbia Logging Tax Act is declared to be of general application on income from logging operations.

In the taxation year of 1963 the appellant paid logging tax to the Government of the Province of British Columbia, pursuant to the provisions of the Logging Tax Act, in the amount of $518,735, plus $9,226 on behalf of a wholly owned subsidiary, or a total of $527,961. In its 1963 return under the Income Tax Act it claimed a deduction, pursuant to Section 41A(l)(a) in the amount of $351,974, being % of the logging tax paid. The tax imposed under the Logging Tax Act was at the rate of 10%, so that, assuming that “income from logging operations in the province ”, referred to in Section 41A(l)(b), means income from logging operations as determined under the Logging Tax Act, the amount deductible under paragraph (b) would be the same as that determined under paragraph (a).

The appellant’s submission is that when paragraph (a) refers to “logging tax paid” it. refers to the actual payment. made to the British Columbia Government. This amount is paid ‘‘in respect of income for the year from logging operations in the province” determined under the Logging Tax Act. Paragraph

(b) refers to income for the year from logging operations in the province referred to in paragraph (a)’’. This means that the words have the same meaning in both paragraphs, i.e. income as determined under the Logging Tax Act. It is contended that the intention of Section 41A was that the computation under both paragraphs was to be the same so long as the rate of tax under the Logging Tax Act was 10%, and that paragraph (b) was only intended to come into play if the province increased its tax rate above 10%.

The respondent refers to paragraph (a) of subsection (2) which provides that ‘‘ ‘income for the year from logging operations in the province’ has the meaning given to that expression by regulation’’.

Regulation 700 states that that phrase means an aggregate of the items described in paragraphs (a) to (d) inclusive. On the facts of this case, paragraphs (b) and (c) are inapplicable, so that it describes, in this case, an aggregate of the amounts defined in paragraphs (a) and (d). Paragraph (d) applies where “standing timber is cut in the province by the taxpayer or logs cut from standing timber in the province have been acquired by the taxpayer, if the taxpayer operates a sawmill, pulp or paper plant or other place for processing logs in Canada’’. In such a case a determination is required of ‘‘the income of the taxpayer for the year from all sources” from which various stipulated deductions are required to be made, to the end that the final result will represent ‘‘income from all sources”. less ‘‘income from sources other than logging operations ’ ’.

It is the contention of the respondent that “income from all sources’’ means, and can only mean, the taxypayer’s income as determined under the provisions of the Income Tax Act.

The following provisions of the Act are relevant in this connection :

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses,

(b) property, and

(c) offices and employments.

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

Section 15 of the Interpretation Act, S.C. 1967-68, c. 7, provides that:

15. Where an enactment confers power to make regulations, expressions used in the regulations have the same respective meanings as in the enactment conferring the power.

The result is that when Regulation 700(1)(d) speaks of income ‘‘from all sources’’ it means income as determined by the application of the provisions of the Income Tax Act, i.e. from all sources (Section 3) less allowable deductions (Section 11(1) (a)). In computing such income, for the purposes of subsection (l)(d) any amount which the taxpayer has claimed and deducted as a capital cost allowance, by virtue of the opening words of Section 11 ‘‘deducted in computing the income of a taxpayer for a taxation year’’, must be deducted.

In my opinion the respondent’s submission is correct. The terms of subsection (1)(d) require a computation to be made of income ‘‘from all sources’’ as determined under the provisions of the federal Act, and not, as submitted by the appellant, under the provisions of the Logging Tax Act.

In my opinion the intent of paragraph (b) of Section 41A(1) was not merely to provide a limit on the deduction of provincial logging tax in case the rate of tax is increased by the province (as contended by the appellant), but also to provide such a limit in case the tax base is increased by a province beyond that set by the federal formula.

The respondent’s computation, based upon his interpretation of Section 41A and Regulation 700, results in a determination of income for the year from logging operations of $1,897,875. This amount was increased by the judgment at trial to $1,960,810.62. Of this amount, the appellant would be entitled to deduct from income tax, under Section 41A(l)(b), 6% %, which is less than 24 of the logging tax actually paid as computed under Section 41A(l)(a), and which is therefore the proper deduction to be made.

In summary, it is my opinion that, in applying Section 41A, the computation required under paragraph (a) of subsection ( 1 ) is based upon the logging tax actually paid to the province ; the computation under paragraph (b) is based on income from logging operations determined pursuant to the federal regulation, involving, when subsection (1) (d) of Regulation 700 is operative, a determination of income from all sources in accordance with the provisions of the Income Tax Act.

This disposes of the appellant’s main submission on this point, and also of the alternative submission that Regulation 700 should be construed to mean that, in computing depreciation, in determining the taxpayer’s income, the rates charged in the accounts and financial statements arrived at in conformity with generally accepted accounting principles and business practice should be applied. As already indicated, it is my view that the computation of income under subsection (1)(d) of that regulation should be on the basis of the amount actually claimed and deducted as a capital cost allowance for the purpose of federal income tax.

It is my opinion, therefore, that the appeal fails on both grounds and should be dismissed with costs.